4 accounting best practices for effective grant management

Grants are a critical component of nonprofit revenue models. They provide significant funding for your most important projects and programs, increasing your nonprofit’s capacity to deliver services and impact its community. That is, if you manage your grants properly!

Effective grant management—the process of securing, tracking, and reporting grant funding—demonstrates to funders that they made a good investment by awarding a grant to your organization. It’s also integral to several internal functions at your nonprofit, most notably accounting.

In this guide, we’ll walk through four best practices for aligning your organization’s grant management and accounting activities for effective internal and external reporting. Let’s dive in!

1. Prepare Financial Documents for Your Grant Application

The overlap between accounting and grant management starts before you submit a single grant application. To be considered for funding, you need to show grantmakers that your nonprofit has a solid track record of fiscal responsibility and a detailed plan for using the grant to further your mission if you secure it.

Depending on the funder’s preferences and the grant’s competitiveness, you might need to submit various documents alongside your proposal to prove that your organization is fiscally responsible, such as:

• • • Past Form 990 filings

    • Recent annual reports

    • Year-in-review treasurer reports

    • Independent financial audit results

For the financial planning aspect, most grant applications include a proposed budget section. Since most grants are restricted to specific programs and projects, your grant budget will likely include:

• • • A detailed breakdown of expenses associated with the program or project in question.

    • Your plan for allocating grant funds to strategically fund those expenditures (most grants don’t cover the entire cost of an initiative).

    • Notes about other revenue sources you’ll use to make up the difference, such as other grants, major gifts, or fundraising events.

Adhering closely to each grantmaker’s unique application instructions is critical to securing grant funding. Before you submit a grant proposal, double-check that you’ve attached the correct financial documents and formatted your budget exactly as that funder requested.

2. Leverage Dedicated Grant Management Tools

When managing their first-ever grants, some nonprofits develop documentation systems using spreadsheets, which can work for tracking grant funding temporarily. However, once grants become a regular revenue stream for your organization, you should switch to a solution that is specifically designed for grant management. 

As you shop for grant management software, look for a platform that includes:

• • • Robust data analytics to evaluate your progress and create more effective reports.

    • Project management features to track task completion, ownership of duties, and deadlines for deliverables.

    • Integration with your nonprofit’s accounting software to facilitate seamless data transfer between these two critical solutions.

You should also consider the software’s user-friendliness, pricing, and customer support access in this process, as well as the types of grants you plan to apply for in the near future (since management practices often differ for government grants vs. foundation grants). Research online, ask for recommendations, and book demos of your favorite platforms to make an informed decision.

3. Record Grant Funding at the Right Time

The right software should make it easy for your nonprofit to track grant progress and funding accurately. The one pain point that may still come up, though, is when to record grant revenue in your accounting system. In many cases, your organization will receive grant funding several weeks or months after learning you’ve won the grant. But the reason for this—and by extension, the proper procedure for recognizing grant revenue—depends on the type of grant you applied for.

Jitasa’s guide to nonprofit revenue recognition explains that there are three main types of grants, each of which should be recorded in your nonprofit’s accounting software at different times:

Jitasa_Foundant_4 Accounting Best Practices for Effective Grant Management_Supplementary [alt text: A table showing the three major types of grants and when to record each one, which are discussed in the text below.]

• • • Unconditional grants are usually provided all at once with no strings attached. Recognize them as soon as you receive the award letter, even if the check or direct deposit takes additional time to arrive.

    • Conditional grants are paid out in installments because your organization has to meet funder-imposed requirements to continue receiving funding (for example, a grantmaker may only agree to support a program as long as it has a certain number of participants). Record the first installment of a conditional grant when you receive the award letter and each subsequent installment when the funding comes in.

    • Reimbursable grants require your nonprofit to spend the money for an initiative up front and track your expenses in detail so the grantmaker can reimburse you for them. You likely won’t know the full grant amount until the funder reviews your itemized expense list and makes the payment, so recognize the revenue when it arrives.

Whenever you find a grant opportunity you want to apply for, note which category it belongs to so you’re prepared to recognize the revenue properly if you win it.

4. Correctly Report on Your Grants

Especially for conditional and reimbursable grants, reporting back to the grantmaker is critical for receiving all of the funding your nonprofit has ostensibly won. And even for unconditional grants, letting funders know how you’ve used the grant can set your organization up to secure more grants down the line. Like with applications, make sure to follow the funder’s requirements closely for the content, format, and timing of your reports.

Because grant management and accounting are so closely related, you also need to include grant funding in your nonprofit’s financial reports, including:

• • • Financial statements. Report grants under temporarily restricted revenue in your statement of activities, under net assets with donor restrictions in your statement of financial position, and under cash inflows from operating activities in your statement of cash flows.

    • Tax returns. Form 990, 990-EZ, and 990-PF all include line items in the Statement of Revenue section for “Contributions, Gifts, Grants, and Other Similar Amounts,” which is where you’ll report grant funding to the IRS. (Nonprofits filing Form 990-N just have to confirm their total gross receipts, which includes any grant funding.)

    • Annual report. While the body of your annual report will mostly feature information on the impact of grant funding on your mission, many organizations attach their financial statements or other grant-related reports as appendices in case readers want to learn more.

Reporting your nonprofit’s grants in all of these externally-facing ways is essential not only for compliance but also to maintain transparency with supporters. As eCardWidget explains, “Being transparent with your donors will lead to stronger relationships and greater satisfaction,” and knowing how your organization funds its mission-related work is a key aspect of this accountability.

Effective grant management involves many moving parts and takes a team to complete successfully, especially if you’re dealing with multiple grants with different requirements simultaneously. Make sure your team includes your nonprofit’s accountant and bookkeeper so you can properly manage the financial side of your grants while furthering your mission by completing a project or launching a program to benefit your community.